HomeArticlesConcept Of Price Elasticity Of Demand And Income Elasticity Economics Essay

Concept Of Price Elasticity Of Demand And Income Elasticity Economics Essay

This essay discusses the different types of snap of demand that how measure demanded get affected from the alteration in different comparative factors. The three types of snap of demand ; monetary value snap of demand, income snap, and cross-elasticity of demand has been discussed in item in this essay. This essay besides discusses how these different types snap of demand can be used in merchandise determinations.

Demand is the measure demanded of peculiar merchandise on a peculiar monetary value that the clients are willing and capable to purchase. There are many things which affect the demand of a peculiar merchandise, but the one thing which is really of import is the monetary value of the merchandise ( Mankiw, 2009 ) . There some other things and factors besides which effects the demand of a merchandise. The factors are related to the consumers like the income of the consumer, gustatory sensation and penchants, and the monetary value of comparative or utility merchandises. The alteration in any or more of these factors affects the demanded measure of a peculiar merchandise in a peculiar clip. This alteration in the measure demanded is non same for all the merchandises ( Baumol and Blinder, 2009 ) . It varies merchandise to merchandise and the grade of alteration in the impacting factor of demand.

This alteration in the demanded measure of a merchandise is called snap of demand. The grade of alteration decides the snap. Elasticity of demand is different for necessity, inferior or luxury goods. The three major and of import factors which affect the demand of any given merchandise are monetary value of the goods, income of the person and the monetary value of comparative goods. The alteration in demand is measured as ‘price snap ‘ alteration due to alter monetary value of goods, ‘Income snap ‘ alteration due to alter in the income of the consumer, and ‘cross snap ‘ the alteration due to alter in the monetary value of comparative goods ( Taylor, 2007 ; Baumol and Blinder, 2009 ; Mankiw, 2009 ) .

Price snap of a merchandise is defined as the alteration in the demand of a merchandise due to alter in the monetary value of merchandise. Economists calculate monetary value snap of the any merchandise by spliting per centum alteration of the merchandise measure demanded by the per centum alteration in that merchandise monetary value. Generally, when the monetary value of any goods raise the demand of that merchandise decreases and increases when the monetary value lessenings. In this manner there is negative correlativity between the monetary value and demand of a merchandise.

Price snap ( Ed ) is of chiefly three types, as we have discussed earlier snap does n’t stay same for all the merchandises, unitary rubber band ( Ed=1 ) , comparatively elastic ( Ed & A ; gt ; 1 ) and comparatively inelastic ( Ed & A ; lt ; 1 ) ( Batabyal and Sharma, 2008 ) . In the unitary monetary value snap, the alteration in the measure demanded is equal to alter in the monetary value of the merchandise ( Ed=1 ) ( Colman and Young, 1997 ) . In other words if monetary value of a merchandise is increased by 20 % the demand will cut down in the same proportion ( 20 % ) . In instance of comparatively elastic merchandises the alteration in measure demanded is greater than the alteration in the monetary value of the merchandise ( Ed & A ; gt ; 1 ) and in instance of comparatively inelastic merchandises the alteration in measure demanded is less than the alteration in the monetary value of the merchandise ( Ed & A ; lt ; 1 ) ( Batabyal and Sharma, 2008 ; Taylor, 2007 ) . This jurisprudence of demand has exclusion in instance of luxury goods. In the monetary value of luxury goods increase the demand of those goods additions.

Figure 1: Types of Price Elasticity

Beginning: Batabyal and Sharma ( 2008 )

Income snap is the 1 of another type of demand snap which changes with the alteration of income in the consumers demand ( Mankiw, 2009 ) . if the income of the comsumers increases the demand of goods is besides increases if the goods are necessary goods. But, it is non the instance with every types of goods. Because, the alteration in the consumers incomes does n’t hold the same affect on overall demand of the goods. For case, even if the income of consuemr has increased it may be possible that the demand of the goods reduces, if the goods is inferior. Income elastcity is calcualted by spliting alteration of income ( per centum ) by alteration in measure demanded ( per centum ) ( Baumol and Blinder, 2009 ) . Most of the goods come under normal goods classs, so in instance of monetary value addition for normal goods the demand of the goods besides increases. It besides shows that the measure demanded and income of the consumer has positive correlativities ( Mankiw, 2009 ) .

Cross snap is the related to the measure demanded of one goods to the monetary value of comparative goods. For case, if there are two goods in the market X and Y. Now, if the monetary value of goods Y additions, the demand of the goods X additions. As the monetary value of one goods affect is demand of other comparative goods. So, it is called the cross snap of demand. The most common illustration given by economic experts is the cross snap of tea and java. If the monetary value of tea increases the demand of java additions, it is besides because both of these goods are in the same class and can be substituted easy ( Baumol and Blinder, 2009 ) . Cross snap is calculated as per centum alteration of measure demanded of one goods divided by per centum alteration in comparative goods monetary value. The relation of two utility goods is positive as addition in the monetary value of one increases the demand of the other ( Investopedia, 2010 ) . One of the noteworthy points here is that in instance of cross snap of demand it is non necessary that the alteration in the demand of one good would be equal to the alteration in the monetary value of the other good.

These types of snap of demand are really of import for corporate universe. If a house knows the snap of their merchandise it can plan a competitory scheme. Every type of snap has their-own significance for the concern house. But how an organisation uses them depends on them. Different snap type monetary value snap is the most of import snap for concern organisations. While decide the pricing scheme of any merchandise direction has to maintain the snap of the merchandise in their head. It is besides of import at the clip when the company is seeking difficult to hike the gross revenues of their merchandise. A company can increase the sale of its merchandises by cut downing the monetary value of goods. Recently, HUL used this in its scheme, when the sale of its merchandise in the detergent class was diminishing. HUL reduced the monetary value of it detersive class which has easy replacements. HUL ‘s that scheme worked and its gross revenues increased in the same one-fourth of the twelvemonth 2009 ( Brahma, 2010 ) .

Now, if we consider the same illustration in the other manner the company reduced the monetary value of its merchandise, because one of its closed challengers has reduced monetary value of its goods. That was the instance of cross snap in which decrease in the monetary value of one goods resulted in the diminution of the demand of the other comparative goods. But, HUL enjoy trade name value in the market so when it reduced the monetary value of its merchandise it gained its lost client and it boosted its gross revenues. But, here at the clip of make up one’s minding their pricing scheme a company should besides see the antiphonal scheme of their rivals. If they come-up with a more competitory scheme the old company may lose its clients to the other.

Conclusively, the above treatment in this essay shows how demand of a merchandise is related to different factors. It non merely the factors related to consumers but besides the market factors affects the demand of a merchandise. Price of the merchandise and income of the consumer are the two factors which has clear affect on the demand of about all the merchandises. But, there are some other factors besides which affects the demand indirectly. These factors are such as consumer gustatory sensation and penchants, household position, trade name consciousness, quality of the merchandise, and the market tendency.

Even though snap of demand can play a great function in make up one’s minding the merchandise scheme, but the result wholly depends on the merchandise type and market conditions. As, in instance of HUL, even after cut downing the monetary value of its merchandise it could merely acquire its lost consumers.